This is expected to cost the typical British pensioner emigrating to Provence, the Dordogne or the Côte d’Azur “tens of thousands of pounds in additional tax”, Wedlake Bell says.
It notes that the new rules, which took effect in January, apply to private pensions or occupational pensions, lump sums generated from deferral of UK state retirement pensions, and Qualifying Recognised Overseas Pension Schemes, or QROPs.
British taxpayers are entitled to take up to 25% of their total pension savings as a tax-free lump sum when they retire, up to a value of £1.8m (reducing to £1.5m from 6 April 2012). Most pensioners opt to take the full 25%.
The change is a result of a provision in the ‘Loi de Finances’, which was passed recently by the French Parliament.
Under the new rules, British expats living in France will now pay French income tax on any private pension lump sum payment worth more than €6,000 (£5,018). The amount that is taxed is after the 10% tax-free allowance for pension income is deducted. The top rate of income tax in France is 41%.
Wedlake Bell urges British taxpayers considering retiring to France to consider taking their lump sum from their pensions “before they arrive in France” to avoid this tax liability.
Explains Emma Loveday, Partner at Wedlake Bell: “Very few British taxpayers who are considering retiring to France will be aware of this change. Many will get a nasty surprise when they take what they think will be a tax-free lump sum payment, only to be presented with a tax bill running into tens of thousands of pounds.
“Anyone looking to retire to France should consider taking the lump sum payment before arriving in France to avoid the tax liability.”
Loveday notes that tax-free lump sum is ordinarily “one of the most attractive benefits of saving for a pension”, and that many pensioners will be particularly reliant on the tax-free lump sum now, with interest rates so low.
“Paying tax on that lump sum could ruin many retirement plans.”
‘Always a grey area’
Graham Keysell, an adviser with the Spectrum financial advisory group, which advises British expats in France as well as elsewhere in Europe, notes that the question of whether lump sums were liable for tax has "always been a grey area" for expats in France.
"Fortunately, French income tax rates are not particularly onerous for people earning less than €26,000 a year (14%)," he adds. "Alot of our retired clients would fall into this category, since their major income is going to commence after they have have taken their lump sum,that is, when they turn the remainder of their pension pot into a regular pension.
"For someone taking early retirement and having no fixed income as yet, they could draw up to approximately €100,000 in a lump sum, and pay absolutely no tax on this."
Another case, Keysell notes, might be an expat with an initial income of €10,000 a year. "They could receive 25% of a €250,000 ‘pension pot (€62,500) and would pay €8,750 tax on this.
"Even people earning up to €70,000 only pay 30% tax, so certain of these people might still be tempted to take the cash lump sum. Obviously, each case would need to be looked at on an individual basis."
According to Wedlake Bell, UK Government Service and local government pensions will remain exempt from French income tax for the time being, although it is understood that the French government is considering bringing those pensions into its tax net as well.
More than one million British pensioners live overseas, and France is among their top five destinations.
